Former Fed Governor: There is a reason EXIT is a four letter word

Former Fed Governor Kevin Warsh appeared on CNBC this morning. For most of the interview, he sounded like a typical government technocrat working with an underlying premise that the Fed money printing can at times save the economy. But what caught my ear is his discussion of how the Fed exits from its current money printing.

Remember, there's nearly $1.5 trillion in excess reserves being held by banks, on top of the new high powered reserve money that Bernanke is going to print. If this money gets into the system, the money growth will be massive. The current multiplier between required reserves and money supply (M2) is near 100. You can do the math with what happens to the money supply if $1.5 trillion in excess reserves hits the system. At such time, the Fed would have to launch an exit strategy and attempt to drain much of the super-money they have printed. How are they going to do that? And that's why the comment by Warsh, that EXIT is a four letter word, is very revealing. It shows that he is very aware things could get out of hand on the money supply growth side very quickly and it will be very difficult for the Fed to stop it. Zimbabwe here we come.







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